2/24/2009 @ 12:01AM

The Buy American Provisions: Another Stimulus Farce

The recent, misnamed, American Recovery and Investment Act of 2009 runs a tidy 407 pages. In this column, I take a worm’s-eye-view of its Buy American Provision, Section 1605, to show the cartwheels that it turns in the tattered cause of economic protectionism. I set it out below so that you can feast on the ambiguities of its language.

Start with its basic prohibition. It says simply enough that for any project covered by the section, “all of the iron, steel and manufactured goods used in the project are produced in the United States.” Read carefully: It is not just the appropriated funds that have to be used to buy American goods.

The restriction applies to all money expended on the project from whatever source. But what, pray tell, counts as a project? Is work done on the north side of a school part of the same project as the renovation done on the south side of the same building? And are goods fabricated with components acquired outside the United States “produced” in the United States?

If some portion of the project is funded by a partner that does not receive stimulus money, is that partner bound by the Buy American restrictions as well? And even if it is clear what funds are “appropriated” for the project, what other money is swept in by the words “made available”? The stimulus bill unwisely leverages its impact to control private funds, both domestic and foreign, on any stimulus project. How far we can’t say.

Ah, but there are exceptions that cut back on the rule. In particular, “the head” of the relevant agency can waive these restraints if they are inconsistent with the public interest. But no one knows which head of the many overlapping agencies gets to make that decision. And what is meant by “the public interest” in this context is anyone’s guess. It surely can’t mean open markets. But we do know that the exception only kicks in if the relevant head supplies “detailed written justification” for deviation from the Buy American policy.

Just think of how this test plays out with getting waivers “whenever iron, steel and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality.” All the operative terms in this test are squishy to say the least. Yet by the time our administrative Hercules assembles the data need for just one determination, the world will have moved on.

In the interim, as Louis Uchitelle reports in The New York Times, many key technologies, including those for green projects, may be left lagging as most of their key components are produced overseas. But not to worry: The economist Robert Pollen reminds us that the stimulus package “is not just trade protection but a form of industrial policy.” Two dumb economic policies for the price of one!

But how dumb? Our next exception supplies one useful clue. Companies can get some relief if the cost of the overall project increases by more than 25%. But there is less here than meets the eye. If the foreign goods are only 10% of the original project, their cost could increase by 250% before this exception kicks in.

There’s more. The full range of protectionist impulse puts us in a collision course with our international trade obligations, including the G20 Standstill Agreement of November 2008, by which we agreed to maintain an open economy in the face of the current downturn. Team Obama gets one cheer for rightly insisting on subsection (d) in order to avoid an instantaneous commitment.

But not two cheers. This deft maneuver is a far cry from junking this misguided provision altogether. The section offers not one word of guidance on just how the muddy provisions of Section 1605 mesh with this or any of our World Trade Organization or bilateral treaty organizations. Section 1605 thus creates the dual fear that American companies will avoid buying needed products from overseas, while our trading partners ratchet up their campaign against us, claiming that strengthening Buy American counts as a trade violation, real or imagined.

Many American business leaders have announced that they can “live with” this Buy American provision. Perhaps they can. But they shouldn’t have to. No principled libertarian wants to live with foolish and unprincipled government compromises. Extirpation of these foolish protectionist provisions is needed, and now.

Richard A. Epstein is the James Parker Hall distinguished service professor of law, the University of Chicago; the Peter and Kirsten Bedford senior fellow, the Hoover Institution; and a visiting professor at New York University Law School. His most recent book, The Case Against the Employee Free Choice Act, will be published shortly by the Hoover Press.

SEC. 1605. USE OF AMERICAN IRON, STEEL AND MANUFACTURED GOODS. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance or repair of a public building or public work unless all of the iron, steel and manufactured goods used in the project are produced in the United States.

(b) Subsection (a) shall not apply in any case or category of cases in which the head of the federal department or agency involved finds that–

(1) applying subsection (a) would be inconsistent with the public interest;

(2) iron, steel and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or

(3) inclusion of iron, steel and manufactured goods produced in the United States will increase the cost of the overall project by more than 25%.

(c) If the head of a federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.

(d) This section shall be applied in a manner consistent with United States obligations under international agreements.